Introduction

The past 12 months has seen some interesting developments in Australian competition regulation. Further substantive developments will occur over the 2013/14 financial year.

In this note, we briefly summarise some of the key developments and trends over the last financial year. We also provide some practical insights into likely developments over the next 12 months.

Notwithstanding a slowing economy, substantial changes are continuing to occur in the Australian competition and regulatory environment. Many of these changes are intended to address legacy issues and streamline regulatory processes.

For your convenience, we have summarised these developments under several key headings and kept this note deliberately succinct.

Changes at the ACCC – four key developments under Rod Sims

The chairman of the Australian Competition and Consumer Commission (ACCC), Rod Sims, is approaching the end of the second year of his five year tenure. Sims continues to be well respected and highly regarded. The ACCC itself continues to be consistently recognised as one of the best competition regulators in the world.

While changes in the ACCC’s approach are not necessarily attributable to Sims alone, we have seen some subtle differences in approach under Sims that will continue to influence the ACCC’s approach over next 12 months:

  • Tougher enforcement: The ACCC is becoming more proactive in its investigations and tougher in its enforcement. Sims has described the ACCC’s core strength as “strong enforcement”, enhancing its credibility when influencing industry conduct. Sims is prepared to litigate more frequently, even if success is not assured.
  • Quality decision-making: We have seen a greater emphasis on high quality decision-making for strategically important and high profile decisions. Sims has referred to this as “getting the big and very public decisions right“. The ACCC has devoted more resources to such decisions, but has also taken longer to make them.
  • Pragmatism and commerciality: We are seeing a more pragmatic and commercially nuanced analysis of competition issues, following from the Federal Court’s comments in the Metcash decision in 2011. Decision-making has been more fact-intensive, resulting in more granular information requests, but more commercially astute decisions.
  • Transparency: We are seeing greater transparency in decision-making and a greater effort to publicly explain decisions. A greater number of investigations have been publicly disclosed. The ACCC has also been systematically amending and updating some of its key process guidelines, including in relation to authorisations and merger clearances.

These four subtle differences in approach have the following practical implications:

  • First, the ACCC’s approach does increase the risk of detection, investigation and enforcement action, particularly in the ACCC’s areas of focus and priority.
  • Second, the ACCC’s greater focus on information-gathering has led to slower decisions on more complex matters.
  • Third, parties stand a greater chance of persuading the ACCC on the merits of a decision if they can point to sufficient evidence to support their arguments.
  • Fourth, ACCC decision-making has been more predictable and arguably of a higher quality, although the quality of ACCC decisions was already generally high.

Areas of focus and priority – the ACCC’s strategic approach

As with most competition regulators globally, the ACCC operates within tight budgetary constraints. The ACCC prioritises its activities based on those sectors and behaviours that it considers are most deserving of regulatory attention. Roughly half of the ACCC’s resources are focussed on these priority areas.

The ACCC considers that some forms of conduct are so detrimental to the competitive process that they should always have priority, irrespective of the sector of the economy in which they occur, namely cartel conduct (i.e., price fixing, market sharing, bid rigging, and agreements on output), anti-competitive agreements, and misuses of market power.

While no criminal prosecutions have yet occurred in Australia for cartel conduct, some 100 approaches have so far been made under the ACCC’s immunity policy, including as part of global cartel investigations. The ACCC is currently focussed on educating industry as to the illegality of cartel conduct given recent studies which indicated insufficient understanding.

The ACCC also prioritises industry sectors and areas of market behaviour that it considers are particularly susceptible to conduct that may harm consumers:

  • Groceries and fuel: The ACCC gives high priority to concentrated markets. A particular area of recent focus has been the grocery and fuel sectors. In February 2013, the ACCC announced it was investigating conduct by the major supermarket chains with the assistance of some fifty suppliers. In June 2013, the ACCC opposed a Woolworths site acquisition leading to speculation that the decision may be litigated.
  • On-line services: The ACCC is focussed on on-line consumer protection and has been taking action against the more serious instances of misleading conduct. The ACCC is also closely monitoring international developments. A number of jurisdictions have major ongoing investigations and prosecutions in relation to the ‘new economy’, including anti-competitive effects associated with disruptive on-line and electronic technologies.
  • Electricity and telecommunications: Both the electricity and telecoms sectors are the subject of substantial regulatory change, as identified later in this note. The ACCC is currently monitoring the privatisation of electricity generation assets and determining the regulatory settings for the National Broadband Network rollout. The ACCC is also focussed on consumer issues arising in door to door sales and misleading advertising.
  • Retail consumers: The ACCC continues to focus on retail consumer guarantees and unfair retail contract terms. Over the last 12 months, the ACCC has undertaken a number of prosecutions in relation to statutory warranties. The ACCC is currently focussed on misleading premium quality claims made by food manufacturers, known as ‘credence claims’, including as part of its focus on the grocery sector.
  • Small business: The ACCC continues to focus on anti-competitive and unconscionable conduct that seeks to exploit or unfairly constrain small businesses, particularly in the context of concentrated markets. The ACCC has been seeking to toughen the Franchising Code of Conduct in the context of an ongoing franchising regulatory review.

Continuing developments in merger review

In the 2011/12 financial year, the ACCC considered 340 potential acquisitions of which 90 proceeded to full review. Around two thirds of these acquisitions were unconditionally cleared while one quarter were either withdrawn or were the subject of undertakings to resolve ACCC concerns. Only seven acquisitions were formally opposed by the ACCC and only one of these publicly. These statistics are consistent with previous years and indicate that only a very small proportion of acquisitions reviewed by the ACCC give rise to serious competition concerns.

Current developments in relation to merger review reflect the ACCC’s greater pragmatic, commercial and transparent approach. Following the Metcash decision in late 2011, the ACCC has generally been more pragmatic and commercially focussed. For those mergers not unconditionally cleared, a greater dialogue with the ACCC can be expected and a more information-intensive approach. This has provided a greater opportunity for engagement with the ACCC to identify and resolve concerns, but has also slowed ACCC decision-making on more complex matters.

On 1 July 2013, the ACCC released updated merger process guidelines for public comment, indicating the ACCC’s continued focus on streamlining review processes. The current process for informal merger review was created in 2006 and is unique to Australia. The efficiency and flexibility of the informal process is a key reason why the formal merger review process has not yet been used.

In its July 2013 draft, the ACCC is proposing to make the following key amendments to the merger review process:

  • Pre-assessments: In keeping with its pragmatic approach, the ACCC will continue to assess mergers quickly if there are no significant competition concerns. The ACCC has increased its utilisation of a ‘pre-assessment’ process which avoids the need for a full public review. Around 75% of the 340 potential acquisitions considered by the ACCC in the 2011/12 financial year were cleared by way of pre-assessment, mostly within 2 weeks.

Click here to see table.

  • Market concerns letters: To increase transparency, the ACCC has been issuing letters to merger applicants that summarise any concerns raised in the context of public consultation (or ‘market inquiries’) by the ACCC. A market concerns letter gives the merging parties an opportunity to respond to any market concerns before the ACCC issues its formal Statement of Issues at the end of the first stage of a merger review.
  • Bespoke timelines: The ACCC proposes to move away from setting standard periods for all public reviews and will instead set more realistic timeframes where it is clear from the outset that a review will take longer given the likely competition issues or complexity. In addition, all timelines will initially include a ‘provisional’ decision date which will be re-assessed after the ACCC is in a position to better understand the breadth and complexity of the issues a merger raises following market inquiries.
  • Expedited PCAs: Public Competition Assessments (PCAs) are the published summaries of the ACCC’s final reasons for its decisions in complex or contentious merger matters. Concerns have been expressed regarding delays in releasing PCAs. The ACCC has indicated it will publish reasons as soon as practicable after a decision, except in circumstances where there is a prospect of litigation.

Following the success of Metcash in challenging the ACCC’s decision to oppose its acquisition of Franklins in 2011, we suspect that challenges to opposition decisions may be more common if the commercial benefits of an acquisition are sufficiently great. In practice, such challenges will involve Federal Court litigation in the context of injunctions and declarations.

Likely impact of the federal election

Following the replacement of the Rt Hon Julia Gillard with the Rt Hon Kevin Rudd as Prime Minister in June 2013, the timing of the Australian federal election is unknown and the outcome of that election is uncertain. Australian Labor Party (ALP) policy in relation to competition policy may change under the Rudd administration, hence ALP policies are uncertain as at 1 July 2013. However, the Hon David Bradbury MP has retained his cabinet position as the current Minister for Competition Policy and Consumer Affairs.

If the Government were to change at the federal election, the Liberal/National Coalition has identified that it may undertake a review of the Competition and Consumer Act 2010 (Cth) if it were elected. One of the Coalition policies is “improving competition rules so competitive forces drive productivity growth”.

The Coalition has indicated that it will undertake a ‘root and branch’ review (i.e., a comprehensive and fundamental review) of competition laws and the competition policy framework in Australia. The review is premised on the view that the current competition laws in Australia are suboptimal and have been criticised by consumers, industry and the ACCC alike. The review would have a particular focus on sectoral issues, including supermarkets, petrol retailing, and issues facing small businesses.

The Coalition has indicated that this would be the first such review of competition laws in Australia for 20 years. Given this, we understand that the review may involve more than an independent review of the Act as occurred in 2001 (known as the Dawson Review) and could involve a fundamental and comprehensive review of national competition policy in the same manner as occurred in 1993 (known as the Hilmer Review). If so, such a review would be timely and could involve substantive refinements to Australian competition law and policy.

Perhaps partly to influence the future direction of any amendments to the Act, the independent MPs Hon Bob Katter and Hon Rob Oakeshott both introduced private members’ Bills to amend the Act during the last few weeks of the Parliamentary session. Both Bills were largely directed at supermarkets. Katter’s Bill requiring forced divestitures to achieve specified market shares. While both Bills have now lapsed after attracting media headlines in an election year, the Bills do illustrate that further legislative amendments to the Act may remain high on the agenda of federal politicians over the next 12 months.

Amendments to the national access regime

In October 2012, the Productivity Commission (PC) was asked by the Assistant Commonwealth Treasurer to assess the role and efficacy of the national access regime in Part IIIA of the Act. The regime enables the ACCC to determine the terms and conditions of access to services provided over nationally significant “essential” infrastructure. Those services must have first been declared to be subject to regulation by the relevant State or Commonwealth Treasurer on the recommendation of the National Competition Council.

The PC was asked to propose ways of improving the operation of the regime to: (a) ensure the efficient operation of, and investment in, essential infrastructure; and (b) promote competition and efficient investment in dependent markets. Essential infrastructure includes ports, airports, railways, roads, sewage, and water reticulation networks. The PC’s draft report was released in May 2013 with submissions on that draft due by 5 July followed by public hearings. A final report is due to be given by the PC to the Government in October 2013.

Various submissions to the PC highlighted concerns by Government that a recent High Court decision has unduly raised the threshold for regulating essential infrastructure. The policy concern is that an overly narrow regime may result in duplication of essential infrastructure that could otherwise be more efficiently shared. In the rail access proceedings in the Pilbara region, Fortescue Mining Group built its own railway line at a cost of some $2.5 billion once it became clear that litigation was delaying access to third party railways.

The PC has recommended the retention of the regime and considers that recent legislative amendments have already addressed concerns regarding the delay and cost involved in applying the regime. However, the PC has recommended that the High Court’s decision should be reversed by applying a lower threshold for regulation. Under the PC’s approach, a facility of national significance would be eligible for regulation under Part IIIA if total market demand could be met at least cost by the facility.

The PC has also proposed the streamlining of the certification of State-based sectoral access regimes, such certification enabling those regimes to displace the national access regime. The PC has proposed clarification that the ACCC will have the power to direct the owner of a facility to geographically extend or expand the capacity of the facility, although such costs would normally be paid by the person seeking that extension or expansion.

Electricity and gas – regulation to address price increases

In December 2011, the Australian Government asked the Productivity Commission (PC) to undertake a public inquiry into aspects of national electricity network regulation. The inquiry was focussed on the regulation of electricity distribution businesses following concerns regarding continued increases in retail electricity prices.

The PC presented its final report to the Government in April 2013 and the report was publicly released on 26 June 2013 at the same time as the Government’s response to the report. The final report highlights that average electricity prices have increased by 70% in real terms from June 2007 to December 2012. The PC considers that spiralling network costs are the main contributor to those increases, partly driven by inefficiencies in the industry and flaws in the regulatory environment.

The PC’s final report contains some 63 recommendations which relate to benchmarking and interconnectors, incentive regulation, network ownership, demand management, reliability standards, governance of National Electricity Market institutions, consumer engagement, and the timeliness in decision making in energy market reform. The PC concludes that reforms made in late 2012 have not addressed many concerns and has recommended further reform, including that state-owned electricity businesses should be privatised.

The Government’s response on the same day highlights that many of the PC’s concerns are already the subject of work programmes by the Standing Council in Energy and Resources (SCER) as part of the Council of Australian Governments (COAG). COAG has been developing an energy reform package to ensure consumers are not paying excessively for electricity. COAG has agreed various measures regarding network regulation, including strengthened economic regulation, improvements to appeals mechanisms, and ensuring network investment is better focussed on the long-term interests of consumers.

Within this context, the SCER has been separately considering concerns regarding the limited merits review of decision-making under the National Electricity Laws and National Gas Laws. The limited merits review process enables distribution companies to appeal certain aspects of regulatory decisions. Some have argued that this has enabled those companies to ‘cherry pick’ aspects of complex pricing decisions for appeal (such as key parameters in the Weighted Average Cost of Capital) in order to obtain more favourable regulatory outcomes.

In March 2012, an Expert Panel commenced the limited merits review and published its Final Report in October 2012. In June 2013, the SCER proposed a legislative package to address the limited merits review issues, to be enacted by the South Australian Parliament later this year. A consultation draft of the new legislation was released by the SCER on 26 June 2013. While the limited merits review process will be retained, some refinements will be made to ensure that the result of the review is materially preferable to the original decision and in the interests of energy consumers.

Telecommunications – a new regulatory paradigm

The telecommunications access regime is set out in Part XIC of the Act. The regime is intended to promote interconnection of networks and the supply of wholesale services sufficient to ensure competition in retail telecommunications markets in Australia.

The Part XIC regime was amended in 2010 to include bespoke provisions for the regulation of NBN Co. Under current Government policy, NBN Co will have a wholesale monopoly in the supply of superfast fixed broadband access network infrastructure. The Part XIC regime ensures that NBN Co will supply access to regulated wholesale services on a non-discriminatory basis under default terms and conditions that may be determined by the ACCC.

NBN Co’s investment is substantial, involving at least AUD 38 billion in infrastructure deployment costs. Most of those costs are incurred up-front and then recovered by revenue cash flows over the life of the network. To reduce investment risk, NBN Co requires certainty that it will receive sufficient revenues to recover its costs. The potential imposition of regulation at any time over the life of the network has the ability to affect revenues, hence substantially increasing investment risk.

An important instrument to address these issues is the ‘Special Access Undertaking” (SAU). The SAU seeks to reduce regulatory risk in the following manner:

The proponent of an SAU (i.e., NBN Co, as “access provider”), has flexibility as to the document it crafts. The ACCC assesses the SAU against a set of statutory criteria. In effect, the access provider must submit an SAU that is reasonable and consistent with the objectives of Part XIC.

Once the SAU is accepted, it displaces the ACCC’s ability to regulate by overriding regulatory instruments to the extent of any inconsistency. In effect, the SAU becomes the source of regulation rather than the ACCC. The SAU may have a substantial term and hence provides a safeguard against unpredictable regulatory intervention during its term.

The SAU has legal effect as a statutory undertaking given by the access provider to the ACCC. Only the ACCC can enforce that undertaking, unless the SAU itself devolves enforcement rights to third parties.

NBN Co has currently proposed an SAU with a 30 year term. The SAU is intended to provide certainty to NBN Co in relation to the pricing and nature of the wholesale services that NBN Co provides, ensuring cost-recovery and certainty in product definition over that period.

Following almost 2 years of industry consultation, NBN Co’s SAU will likely to be the subject of a ‘notice to vary’ by the ACCC in which it will ultimately be accepted if certain specified amendments are made. If an ALP Government is re-elected, the SAU should be accepted by the ACCC during 2013. If a Coalition Government is elected, it is possible that an alternative approach may be adopted and the SAU could be amended or withdrawn.

The proposed SAU is unprecedented in its length, scope and importance. It will likely become the critical document that will shapes the telecommunications landscape in Australia for the next 30 years, effectively as a new regulatory paradigm.

Port access and agriculture – deregulation of the wheat industry

A number of areas of the Australian economy are continuing to experience deregulation and privatisation. By way of example, the New South Wales Government privatised the Ports of Botany and Kembla in March 2013 and is currently looking to privatise the Port of Newcastle.

One economic sector that is undergoing substantial regulatory change is the Australian wheat industry. The Wheat Export Marketing Amendment Act was enacted into law in December 2012. The legislation completed the deregulation of wheat exports, but has also replaced sectoral access regulation with potential reliance on an industry code.
Historically, the Wheat Export Marketing Act 2008 required entities operating grain port terminals to have in place an ‘access undertaking’ approved by the ACCC. The amendments have abolished that requirement, but on the condition that a voluntary industry code of conduct covering access to grain export terminals is in place (Code). If the Code is approved by the Commonwealth Treasurer, the market will move to full deregulation from 1 October 2014. The industry will be subject to general competition law and complemented by the Code.

A Code Development Advisory Committee (CDAC) has reached agreement on a set of key principles for the Code and provided these to the Minister for consideration. Following approval from the Minister, the Government will develop an exposure draft of the Code. The draft will be released for public consultation during 2013. Once the Code is finalised, the final draft will be submitted to the Assistant Treasurer for approval before it is prescribed as a mandatory code by the ACCC.

Our current expectation is that the Assistant Treasurer, the Department and the ACCC will collectively seek to ensure that the Code does not result in a material weakening of the existing regulatory regime. The Code is unlikely to result in continued ACCC direct oversight, hence some weakening may be inevitable. However, if infrastructure owners were too unreasonable, this would result in port users seeking regulation to be applied under the national access regime.